Home

The Meaning of Cost Classification by Activity Function

7. The flexibility of information provided by management accounting is reflected in:

A. Information characteristics.

B. Scope of report.

C. Report form.

D. All of the above are correct.

Maybe you are interested!

8. Management accounting provides information:

A. Useful for financial management.

The Meaning of Cost Classification by Activity Function

B. Can only be expressed in money.

C. Entire enterprise.

D. Each business unit.

9. Management accounting is:

A. Detailed accounting of financial accounting to collect costs and calculate product cost.

B. A part of financial accounting serving business management.

C. An accounting department independent of financial accounting that serves corporate governance.

D. General accounting of financial accounting.

10. Management accounting and financial accounting are similar in that:

A. Using the same initial accounting information.

B. Provide information on the financial situation of the business.

C. Together demonstrate the responsibility of all levels of business management.

D. All of the above statements are correct.

11. Management accounting is built and standardized:

A. In the general accounting policy of the State.

B. In the accounting policy of each industry.

C. According to the control needs of capital owners.

D. According to the management needs of the administrator.

12. Managers require information from management accountants:

A. Ensure high accuracy.

B. Fast and reliable is better than accurate but slow.

C. Accurate and fast.

D. Objective and accurate because there must be supporting documents.

13. The objectives of management accounting are:

A. Provide information on the financial situation, performance and capital use of the enterprise.

B. Process accounting data to perform analysis, forecasting, inspection and decision making functions.

C. Provide information as requested by external users.

D. All three sentences above are wrong.

14. Management accounting and financial accounting differ in which of the following areas:

A. Information provider.

B. Information characteristics.

C. Scope of reporting.

D. All of the above.

15. Information with less emphasis on accuracy, with non-monetary information provided mainly by:

A. Financial accounting.

B. Management accounting.

C. Both sentences above are correct.

d. The above two sentences are wrong.

16. Management accounting reports are usually prepared at the time of:

A. At the end of the accounting year.

B. At the end of the quarter.

C. When the competent authority requests an inspection.

D. When managers need information to perform management functions.

17. Management accounting information must ensure:

A. Simplicity and brevity.

B. Effective support for managers in the new business environment.

C. Both (a) and (b) are correct.

D. Both (a) and (b) are incorrect.

18. Accounting does not stop at providing accurate information but requires that the accounting information provided must:

A. Flexible

B. Timely.

C. Useful.

D. All of the above are correct.

19. Which of the following groups is least likely to be provided with management accounting reports:

A. Board of Directors.

B. Workshop manager.

C. Shareholders.

D. Management at all levels.

CHAPTER 2. METHODS OF COST CLASSIFICATION


Chapter Summary

Cost classification helps managers understand the nature of cost factors arising from which they can take measures to control and reduce costs to the lowest level.

The main cost classification criteria introduced in the chapter include: Fixed costs and variable costs are classified based on the cost behavior with the scale of the organization's operations. Direct costs and indirect costs are classified according to the relationship of costs with cost objects. The terms controllable costs and uncontrollable costs are used to describe the ability of managers to control costs. Costs in a business are classified based on the function of operations including production costs (direct materials costs, direct labor costs and manufacturing overhead costs) and non-production costs (selling costs and business management costs). The terms product costs and period costs are classified based on the time they are recorded in the accounting statements.

While studying costs, we also study the economic nature of costs. Opportunity costs are the potential benefits lost by choosing one option over another. Sunk costs are costs that have been incurred in the past and do not affect current or future decisions. The concept of differential costs refers to the cost differences among options.

Methods of separating mixed costs into variable and fixed costs help managers control and predict future costs appropriately.


2.1. Concept and classification of costs

2.1.1. Concept of cost

Production and business costs are studied from many different perspectives. In financial accounting, costs are considered actual expenses incurred in connection with production and business activities in a certain period. In management accounting, costs can be actual expenses incurred in production and business activities, but can also be considered estimated expenses to carry out a production and business activity or can also be considered expenses lost when choosing one option instead of another, or the difference in expenses when comparing two options to choose an optimal option.

On the other hand, production costs can also be generally understood as the expenditures on live labor and materialized labor for production in a certain business period and are expressed in money.

2.1.2. Cost classification

In management accounting, production and business costs are classified in many different ways, depending on the purpose of using information by managers in each enterprise. Normally, the types of costs incurred and the way of classifying costs depend on the type of business organization. Therefore, understanding how to classify costs and the behavior of each type of cost is the key to making the right decisions for the success of the process of organizing and operating business activities of managers within the enterprise.

Therefore, the classification of costs in management accounting can be based on many different criteria such as: According to the economic content of costs, according to the economic function of costs, or according to the relationship with the period of determining business results with costs or can also classify costs according to the inductive method, classify costs according to the relationship with product volume (according to the behavior of costs), or according to many different cost classification criteria.

2.2. Cost classification by operational function

2.2.1. The significance of cost classification according to operational functions

Costs are considered from many different perspectives, each classification criterion is meaningful to managers in the process of controlling costs and operating businesses. On the other hand, cost classification criteria also have the meaning of providing information to all external subjects to achieve different goals.

Classifying costs by activity function to divide costs into two basic types, production costs and non-production costs, has implications for all subjects interested in costs.

- Determining the production cost and total cost of the product is the basis for determining the gross profit and sales profit of the departments and the entire enterprise.

- Determining the role and position of cost items in the production cost and total cost indicators is the basis for building a business performance reporting system by item. At the same time, it is an important source of information for corporate income tax settlement for operating organizations.

- Classifying costs by operational function is also the basis for managers to build a cost estimate system according to items and factors to analyze and evaluate cost fluctuations, which is a source of information for cost control in the enterprise.

2.2.2. Classification content

According to this classification, the total production and business costs of an enterprise are divided into two types: production costs and non-production costs.

2.2.2.1. Production costs

Production costs are expenses incurred within the production scope of the enterprise. Normally, the production scope of business organizations is workshops, teams, groups, etc. Production costs can be understood as the consumption of production factors such as labor, machinery, equipment, raw materials and other costs to create the cost of products or services in the period. Production costs are often divided into three basic items:

- Direct material costs: These are the costs of main and auxiliary materials, fuel, etc. that accountants can directly collect for the cost-bearing object. The characteristics of direct material costs are often variable in nature, they constitute the entity of the product, accounting for a fairly high proportion in the product cost index. Normally, direct material costs can be set for a product unit, which is both the basis for building estimates and the basis for cost control. However, in reality, the direct material cost item depends on the characteristics of business activities in different industries.

In basic construction enterprises, the products are works and construction items, so the direct material costs are iron, steel, cement, bricks, sand, etc. This cost often accounts for a high proportion in the cost of the project. In garment enterprises, the products are pants and shirts, the direct material cost is fabric, this cost often accounts for 30-40% of the production cost of the product. In tourism and entertainment service enterprises, the direct material cost accounts for a small proportion in the production cost index of the product.

- Direct labor costs: include salaries, allowances and deductions based on salaries, meal allowances, etc. of workers who directly create products. The characteristics of this cost item are often variable in nature, often establishing norms for a product unit to contribute to cost control and building a cost estimate system. For direct labor costs, accountants can directly aggregate them to cost-bearing objects similar to direct material costs. The direct labor cost item also depends on the characteristics of each enterprise, the characteristics of business activities, and the financial mechanism of the enterprises. Normally, enterprises that produce manually and use a lot of labor have a significant proportion of direct labor costs in the product cost index. Enterprises that produce with modern technology and use less labor have direct labor costs in the small proportion of product cost index.

- General production costs: these are the costs for workshops, teams, and groups in the production process to create products and services. In the actual production process, production costs often include the following factors:

+ Workshop and production team staff costs include salaries, allowances, salary deductions and other expenses payable to subjects such as foremen and deputy foremen.

Workshop foreman, team leader, deputy team leader of production teams, economic staff, warehouse keepers of workshops and production teams.

+ Material costs for the workshop and production team. This cost includes stationery, other materials needed for workshop repair and maintenance, etc.

+ Cost of tools and equipment for workshops and production teams. These costs vary depending on the operating characteristics of different workshops and production teams. These costs may include protective clothing for workers, tools for production workers such as hammers, saws, welding rods, etc.

+ Depreciation costs of fixed assets serving the production process. In the production process in workshops or production teams, there are often many fixed assets participating in the production process with different characteristics, so the application of depreciation methods for these assets is also different in order to recover investment capital. Normally, machines with rapidly changing technology often apply the decreasing depreciation method, while fixed assets such as factories often apply the average depreciation method.

+ Outsourced service costs include electricity, water, etc. used for the production process of workshops and production teams.

+ Other costs include expenses such as factory reception, damage during production, etc.

General production costs include many cost elements, some of which are fixed costs, some of which are variable costs, but some of which are both, which is a mixed cost. Therefore, business administrators who want to control the elements in this cost item need to separate the cost elements into two parts: fixed costs and variable costs.

2.2.2.2. Non-manufacturing costs

Non-production costs are costs incurred outside of a business's production. Non-production costs usually include selling costs and business management costs.

- Selling costs: are the costs of serving the consumption of goods and products of business organizations. These costs include many factors, each cost factor usually includes both variable costs and fixed costs. Therefore, to control cost items, it is necessary to separate each cost factor into variable costs and fixed costs. In practice, selling costs include:

+ Sales staff costs are salaries, bonuses, allowances, and salary deductions of sales staff. Currently, businesses often set sales staff salary standards based on the achieved revenue level to both control costs and motivate revenue growth.

+ Cost of materials for sales usually includes stationery and product packaging.

+ Cost of tools and equipment for sales often includes the cost of allocating tools such as counters, shelves, scales, quality control of goods, etc.

+ Depreciation costs of fixed assets used for sales such as depreciation of stores, warehouses, means of transport, supermarkets, billboards, etc.

+ Cost of purchased services such as electricity, water, advertising services, marketing, etc.

+ Other costs for sales such as reception, commission...

Thus, selling costs include many elements, but each element often represents a mixed cost, all serving the consumption of goods from the finished product warehouse to the place of consumption.

- Business management costs: these are the costs that serve the operating apparatus of the operating organizations. Business management costs include many cost elements, each element usually includes fixed costs and variable costs. Therefore, managers who want to control cost elements need to separate them into two parts: fixed costs and variable costs.

Business management costs include staff costs for the operating apparatus, material costs for management, tool costs for management, depreciation costs of fixed assets for management, costs of outsourced services for management and other costs.

If we consider each relationship of costs with the cost-bearing objects, non-production costs are often considered indirect costs. Therefore, to accurately determine the consumption results and business results of the departments, it is necessary to have appropriate cost allocation criteria.


Straight

The summary diagram of cost classification by activity function is as follows:


Direct material cost

Cost of raw materials



Indirect material costs


Straight


Product

Allocation

General manufacturing costs

Other costs incurred in the workshop

Indirect labor costs


Labor costs

Direct labor costs

Figure 2.1. Cost classification by operational function

2.3. Cost classification according to cost behavior

2.3.1. The significance of cost division according to cost behavior

Cost behavior is a term used to express the change in costs corresponding to the levels of activity achieved. Indicators showing the level of activity are also very diverse. In manufacturing enterprises, we often encounter indicators showing the level of activity such as: the amount of work performed, the volume of products produced, the number of hours of machine operation, etc. When considering the behavior of costs, it is also necessary to distinguish between the operating range of the enterprise and the operating levels that the enterprise achieves in each period. The operating range indicates the maximum operating capacities such as the capacity of machinery and equipment, the number of working hours of workers, etc. that the enterprise can exploit, while the operating level indicates the specific levels of activity that the enterprise performs in a period within the limits of that operating range.

When talking about cost behavior, we often imagine a change in the ratio between costs and the levels of activity achieved: the higher the level of activity, the greater the amount of costs incurred and vice versa. However, the type of cost that behaves like this is only a part of the total costs of the enterprise. Some types of costs are fixed in nature, not depending on the level of activity achieved during the period, and in addition, there are also some other costs whose behavior is a combination of both types of costs mentioned above. Therefore, in terms of behavior, the costs of the enterprise are divided into 3 types: Variable costs, fixed costs and mixed costs.

The division of costs according to cost behavior into variable costs, fixed costs, and mixed costs is meaningful for analyzing the relationship between costs, volume, and income in order to make business decisions. How much volume should a business produce and consume, and what should be the structure of its products to achieve the highest income?

Used to prepare business performance reports according to cost behavior, departmental reports to make decisions that need to be analyzed, maintain or terminate the activities of departments.

Used to analyze the fluctuations of expenses that play a role in controlling expenses to help reduce overall costs for the business.

2.3.2. Classification content

2.3.2.1. Variable costs

Variable costs (also known as variable costs) are expenses that are often proportional to production results or scale of operations. Variable costs are very diverse and rich, including direct material costs, direct labor costs, customer commissions, etc. In businesses, variable costs often have the following characteristics:

Comment


Agree Privacy Policy *